THE MISSISSIPPI LEGISLATURE

The Joint Committee on

Performance Evaluation and Expenditure Review

Report # 526

A Review of the State Tax Commission’s Methods for Evaluating the Accuracy of Property Appraisals

Executive Summary

Introduction

A resident of Lauderdale County raised concerns regarding the accuracy of property taxes levied in that county following an increase in the individual’s property tax bill that occurred during a perceived decline in property values due to a falling housing market. The resident was concerned not only about the accuracy of his own property tax bill, but also about the accuracy of property tax bills throughout the county.

PEER performed the review to answer this question: Are there unjustified differences in owners’ property tax bills resulting from differing appraised values for comparable properties?

Background

Counties rely on property taxes to fund the operating budgets of local governments, and public works and school districts. Property taxes are calculated based on assessed value of property, which is a function of that property’s appraised value. The state’s system of property taxation involves estimation of a property’s value and taxation of equal proportion for all taxpayers within a taxing district based on the estimated value of their properties.

Section 112 of the MISSISSIPPI CONSTITUTION states that “taxation shall be uniform and equal throughout the state.” Section 112 also states that residential property shall be assessed at 10% of its true value (or market value for the purposes of this report and as defined by MISS. CODE ANN. Section 27-35-50 [1972]).

In 1977, the Mississippi Supreme Court heard a case that involved an owner of multiple commercial properties of the same use and physical characteristics located in multiple counties that were valued and taxed differently1  in each county. That case, Fondren v. State Tax Commission, 350 So. 2d 1329 (Miss. 1977), eventually resulted in the ruling that the Mississippi State Tax Commission (MSTC) is responsible for the equalization of land rolls between counties per Section 112 of the MISSISSIPPI CONSTITUTION.

Thus it is the duty of MSTC to examine the assessed valuations of each county in order to determine whether the assessed valuation of any class of property in one county is not equal to or uniform with the assessed valuation of the same class of property in the other counties and to determine if any class of property in any county is assessed contrary to law. The Mississippi Administrative Code sets out requirements for updating property values and methods, standards, and parameters for assessing the accuracy of property appraisals.

How the State Tax Commission Evaluates the Accuracy of Property Appraisals

The Mississippi State Tax Commission’s Property Assessment Division has methods, standards, and parameters in place for measuring the accuracy of a county’s appraisal efforts. These methods, standards, and parameters were designed to measure how well property is appraised within a county and how county appraisal efforts compare with each other.

The MSTC’s Property Assessment Division audits each county to determine whether that county is in compliance with requirements of the Mississippi Administrative Code. Each real property audit consists of a review of close inspections of real property parcels, a cost index study, and a ratio study.2  (Pages 7 through 10 of this report contain discussions of these processes.)

The ratio study is the principal tool for measuring the appraisal performance of a county. Two values are needed to construct a sales ratio for a parcel: the appraised value of the parcel, which is obtained from the county assessor’s records, and the sales price of the parcel, which is obtained from buyers’ responses to questionnaires. Provided that a ratio study is based on reliable sales price information, it is the most objective tool for measuring the appraisal performance of a county. Without a ratio study, it is not possible to quantify appraisal accuracy.

Any county that fails its real property audit must adopt and submit to MSTC for approval a plan for achieving compliance with standards. Also, the county must begin implementation of the approved plan so that compliance will be achieved by the second succeeding year’s assessments following the year in which the county is not in compliance. Failure either to adopt or to submit an approved plan for achieving compliance or failure either to implement or to follow an approved plan will cause MSTC to withhold the county’s homestead exemption reimbursement monies until such time as the county has complied with the audit standards. In the event the county does not comply with audit standards by the end of the state’s fiscal year, the MSTC will place the monies so held in an escrow account. Any interest on the account accrues to the benefit of the county.

As of May 2009, five Mississippi counties had failed their real property audits and were in the process of coming into compliance with MSTC requirements. Those counties are Tishomingo, Prentiss, Desoto, Pontotoc, and Leake.

Individual Objections to Property Appraisals

The three tests included in ratio studies serve as checks on the process of appraising groups of properties. Individual concerns about property values and taxation are addressed in a county-level appeals process. MISS. CODE ANN. Section 27-35-83 and Section 27-35-89 (1972) provide a procedure for this appeals process.

Conclusions

According to the State Tax Commission’s most recent determination, seventy-seven of the state’s eighty-two counties appraise Class I property accurately and these property values are equalized. However, if the commission were to adopt more stringent standards for appraisal accuracy and equalization, such as those suggested by the International Association of Assessing Officers, nearly half of Mississippi’s counties would not be in compliance and thus property values are not equalized according to industry norms.

According to the MSTC staff, seventy-seven of the eighty-two counties were in compliance with its standards and parameters as of 2008 and thus it would appear that most counties are appraising Class I property accurately and that the values are equalized throughout the state.

However, if more stringent standards were applied, fewer counties would meet the standard for accurate Class I property appraisal and equalization. For example, if the State Tax Commission used the standards suggested by the International Association of Assessing Officers3  for the evaluation, nearly half of Mississippi’s eighty-two counties would not be in compliance with those standards. This suggests that, according to industry standards, property values in Mississippi counties are not equalized and taxation is not uniform throughout the state.

Also, ratio study reliability is vulnerable due to necessary reliance on sales files, inappropriate or unethical selection of sales, and wide ranges of acceptable summary assessment figures. The State Tax Commission lacks a direct equalization mechanism that would equalize assessment levels for those counties that fail to meet assessment level performance standards. While the ratio study process is flawed, it remains the best tool that the industry and counties have available to carry out an important aspect of meeting the constitutional requirements of uniformity and equity.

Recommendations

1. The Legislature should adopt general law containing language similar to that found in Senate Bill 2045, Second Extraordinary Session of 2009 (i. e., the State Tax Commission’s appropriation) that requires formal action and public knowledge of windfall receipts gained without the adjustment of millage rates by the governing boards. Senate Bill 2045 states in Section 8 that county homestead reimbursement fund monies should not be distributed to counties in which assessed values of the taxing area increased as a result of reappraisal of the property unless a notice is published in a newspaper explaining that the previous year’s revenue could be reached at a lower millage rate.
   
   The public notice would, in effect, make county citizens aware that, but for the decision of the boards of supervisors to maintain the bonus revenues, taxpayers would not be subject to increased taxation over the previous year’s bill and still fully cover the cost of local government. Not realizing the bonus revenue would require the lowering of millage rates by the boards of supervisors. This policy would require boards of supervisors to acknowledge publicly their allowance of and responsibility for an increased taxation through means other than those established in law and practice.
2. PEER has identified four mechanisms for increasing reliability of ratio studies in Mississippi counties. They are:
   
   
   • Enact a law requiring all warranty deeds recorded to include the actual sales prices of sold properties, with a penalty for those who falsely report. The disclosure of property sales prices on deeds would enable county tax assessors to form more complete and statistically sound sales files on which to base ratio studies. Mississippi is one of fourteen states that are currently non-disclosure states.4  Current Mississippi custom allows for the withholding of sales values of sold properties on property deeds. Return rates for sales questionnaires are often quite low and questionnaires are often incomplete upon return. Disclosure laws allow for the inclusion of sales prices on the property deed exchanged at time of sale. Were Mississippi assessors to have access to sales data on the deed, the volume of sales for the sales file could increase substantially for counties with few sales. According to a review of each county’s most recent sales file, more than half of counties (fifty-two) had fewer than fifty sales with which to determine the level and uniformity of assessments for the whole county. Not only would this measure be cost- and time-saving, it would strengthen the validity of ratio studies conducted on more complete sales files.
   • Develop a tracking system for sales file rejections. The MSTC staff spot-check the sales files of counties when conducting real property audits throughout the year. Spot-checks include checking for the exclusion of ineligible sales as well as the inclusion of all eligible sales. However, the potential exists for some eligible properties to be intentionally excluded by county staff in order to maintain state ratio standards. Tracking the sales file rejections through a coding system in the MSTC-provided appraisal software could deter some degree of manipulation of sales files.
   • Extend the allowable time frame from which to include sales and look beyond county borders for appropriate and similar sales to include in sales files. Ratio studies use sales files compiled of property sales that have occurred within the past calendar year. Counties that lack a sufficient number of sales in that time frame could benefit from additional sales if the window of time of eligible sales were widened. However, due to market fluctuations and rising construction costs, the time frame should be limited to a period of eighteen months or two years to avoid the added complication of accounting for inflation and other trends. Further, county lines delineate political borders, but not necessarily market, geographic, or demographic differences. County assessors, in cases of low numbers of sales values with which to conduct a ratio study, should consider using property sales from neighboring counties of similar market, demography, and land characteristics as sales by which to assess their own performance. The IAAO suggests the practice and has established guidelines for maintaining the representativeness and validity of sales files which could be applied to such extra-county sales inclusions: (1) Extra-county parcels must be valued similarly to those in the county observing them; (2) Property characteristics must not differ substantially; (3) Extra-county sales must not come from areas of assessment levels which differ from the general assessment level of the population; and (4) Extra-county sales must be carefully screened to ensure that they provide valid market value indicators. The MSTC has encouraged this practice and has offered to provide guidance in identifying appropriate sales for such practice. This policy, rather than the total abandonment of ratio studies (as has been the case in Issaquena County, which frequently has too few sales) should be insisted upon in consideration of insufficient numbers of sales.
   • Implement IAAO standards for ratio study tests and equalization. Several states have adopted the IAAO’s standards for level of assessment, assessment uniformity, and assessment equity (see page 16). While the standards of the IAAO are advisory and compliance is voluntary, they represent a consensus among assessing professionals for achievable measures. The MSTC recently narrowed its range for the level of assessment from +/- 20% of market value to +/- 15% of market value (from 0.80-1.20 to 0.85-1.15), but still remains outside of the industry standard of +/- 10% of market value (0.90-1.10).
     
     The IAAO also suggests that direct equalization be carried to ensure that all classes of homes are assessed at their proper tax share. As explained in the limitations to ratio studies section, equalization may be carried about between classes of homes through stratification (sorting and grouping together similar houses), but stratifying among properties in the same geographic areas or between urban and rural properties may also serve to equalize between properties. Stratification may help to ensure that no systemic inequity exists among property taxpayers in urban areas versus property tax payers in rural areas. The stratification of classes of homes would be easiest among counties of greater population, which presumably have the widest variety in class of homes.

1  The properties were valued and taxed differently than expected even when taking into consideration local millage rates that differ from location to location.

2  The sales ratio of a parcel of real estate is equal to its appraised value divided by its sales price multiplied by 100. If an appraisal is accurate, the sales ratio equals 100%--i. e., the appraised value is equal to the sales price.

3  The International Association of Assessing Officers (IAAO) is a nonprofit educational and research association of individuals in the assessment profession and others with an interest in property valuation. Membership includes individuals working in government, private industry, and academia, as well as members of the general public.

4  In addition to Mississippi, Alaska, Idaho, Indiana, Kansas, Louisiana, Maine, Missouri, Montana, New Mexico, North Dakota, Texas, Utah, and Wyoming are the non-disclosure states.

PEER Home Page         Full Text PDF (3,918K)